Washington and Lee Law Review Washington and Lee Law Review

Volume 63 Issue 4 Article 6

Fall 9-1-2006

Shareholder Democracy and the Economic Purpose of the Shareholder Democracy and the Economic Purpose of the

Corporation Corporation

Donald J. Smythe

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Shareholder Democracy and the EconomicPurpose of the Corporation

Donald J. Smythe*

I. Introduction

Interdisciplinary scholars often speak at cross-purposes. At times, theirefforts may elicit little more than bemused indifference. But scholars with aninterest in the corporation clearly need to communicate across disciplinaryboundaries. We will never have a complete understanding of the corporation asa social, political, and economic entity unless we understand it coherently in allits dimensions, and we will never understand it coherently in all its dimensionsunless we examine it rigorously from all perspectives. History is a source fromwhich scholars across the humanities and social sciences draw insight, and so asymposium on understanding corporate law through history provides a rareopportunity for scholars from various disciplines to exchange alternative pointsof view.

Colleen Dunlavy has undertaken an extensive study of the governancemechanisms of nineteenth century corporations.' As she has carefullydocumented, the common law rule of one-vote-per-shareholder persisted wellinto the nineteenth century.2 This is surprising because it seems to contradictthe usual alignment of wealth and economic power in a market-based economy.Professor Dunlavy attributes the persistence of the one-vote-per-shareholderrule to the social conception of the corporation in early nineteenth centuryAmerica as a "body politic" and to norms that treated shareholders more like

* Associate Professor of Economics and Law, Washington and Lee University. M.Phil.,Ph.D., Yale University; J.D., University of Virginia; B.A., M.A., Carleton University. Mythanks to Eric Hilt for allowing me to cite his unpublished manuscript, "Corporate Ownershipand Governance in the Early Nineteenth Century."

1. See Colleen A. Dunlavy, From Citizens to Plutocrats: Nineteenth-CenturyShareholder Voting Rights and Theories of the Corporation, in CONSTRUCTING CORPORATEAMERICA 66, 68 (Kenneth Lipartito & David B. Sicilia, eds., 2004) (discussing the fourelements of Dunlavy's analysis of nineteenth century corporate governance).

2. See id. (discussing the emergence of plutocratic voting rights in the 1850s).

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citizens in an egalitarian polity than modem-day investors in a profit-makingbusiness venture.

There is no disputing Professor Dunlavy's facts-the one-vote-per-shareholder rule was much more prevalent at the start of the nineteenth centurythan it was at the end of it-but one might demur at her explanation. ThisComment suggests an alternative view: The persistence of the one-vote-per-shareholder rule in the early nineteenth century and the transition to one-vote-per-share by the end of the nineteenth century may have had more to do withthe economic purpose of the corporation than with the early nineteenth centurysocial conception of the corporation as a body politic. Indeed, from thisperspective the social conception of the nineteenth century corporation wasbound up with its economic purpose, and it changed as the economic purposeand function of the corporation evolved.

I. The Corporation as a Market Institution

The corporation is a market institution and, like all market institutions, it isa social construct with important social, political, and moral implications.Corporations make decisions that affect the allocation of scarce economicresources, the distribution of income, domestic political outcomes, and thescope of human rights. They decide, for instance, how much steel to buy, howmany SUVs to produce, how to finance their employees' retirement plans,whether to outsource customer service operations, and whether to transact withsuppliers that use child labor. In spite of all the important social and politicalimplications, they do not make their decisions democratically, at least not as theterm is commonly understood. Indeed, as Professor Dunlavy points out, underthe one-vote-per-share rule that predominates in the United States today,decision-making power among the shareholders of the corporation is distributedquite plutocratically. 4 In theory, a shareholder's voting power is in proportionto her property rights in the corporation; the larger her stake, the greater herinfluence.5

Of course, it is well known that in most public corporations today6shareholders exercise little control over the directors and senior executives.

3. See id. at 67-68 (discussing the democratic nature of early nineteenth centurycorporate governance).

4. See id. at 67 (stating that modem corporations base shareholder power on the amountof capital invested).

5. See id. (discussing the relationship between capital investment and shareholdercontrol).

6. Indeed, the modem debate about the scope of shareholder democracy is more

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Under state corporation statutes, responsibility for the management of thecorporation is vested in the board of directors.7 In practice, the board ofdirectors necessarily delegates many decisions to the senior executives and isusually dependent on the senior executives for most of the information that ituses in making any other decisions.8 Unless they happen to own a controllingstake, shareholders thus usually have little, if any, influence over thecorporations in which they own shares. In fact, most stock investors today holda diversified portfolio of stocks and other financial assets, and it would bealmost impossible for them to acquire the knowledge and expertise in all of thevarious facets of the business activities that their corporations engage in forthem to participate in any meaningful way in corporate decision-making. Mostshareholders are in fact quite content to leave corporate decisions to thedirectors and senior executives of the corporation.

Of course, in theory, the shareholders could always coalesce around anissue or cause and exercise some control over the corporation through theirpower to elect or remove directors.9 And decisions that effect fundamentalcorporate changes, such as the decision to merge with another company,liquidate assets, or change the corporate charter usually do require ashareholder vote.10 Moreover, the management may submit some of theirdecisions for shareholder approval regardless of whether they are strictlyrequired to do so by the state's corporation laws."' But for the most part,shareholders do not exercise much influence over corporate decisions, and theydo not appear to have much interest in doing so. In practice, the modemAmerican corporation is even less democratic than the one-vote-per-share rulesuggests.

In that regard, the corporation is no different from other marketinstitutions. All market institutions are social constructs, and the delegation ofsocial decisions to markets always has political consequences. 12 Indeed, there

concerned with the accountability of corporate managers to their shareholders than with thedistribution of voting power among shareholders.

7. See STEPHEN M. BAINBRIDGE, CORPORATION LAW AND EcoNoMics 9 (2002) (statingthat the operation of corporations are generally vested by statute in the board of directors).

8. See id. (discussing the delegation of managerial decisions).

9. See, e.g., MODEL Bus. CORP. ACT §§ 7.28, 8.08 (2003) (discussing the procedures bywhich shareholders elect or remove corporate directors).

10. See id. §§ 10.03, 11.04, 12.02 (2003) (outlining the voting power of shareholders).11. See BAiNBRIDGE, supra note 7, at 441 (pointing out that the vast majority of corporate

decisions are made by the directors or senior executives).12. There are basically two ways of organizing social decision-making: one is by

delegating decision-making power to the individual participants in private market transactions,and the other is through the command and routine of government bodies and bureaucracies.

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is an inveterate strain of libertarian thought that views the delegation of socialdecisions to markets as necessary to protect individual liberties against thetyrannies of the collective decision-making processes of governments. Miltonand Rose Friedman, for instance, have famously argued that governments tendto be controlled by special interests and that their actions are often confoundedby misaligned bureaucratic incentives and inadvertent bureaucraticincompetence.' 3 Moreover, their decisions typically constrain and bind all,without exception.14 Thus, an individual voter cannot exempt herself from adraft, or opt out of the tax obligations of a new Medicaid prescription drugbenefit, or decline to participate in the social security system. From alibertarian perspective, delegating decisions to the market (in these examples,by choosing to have voluntary armed forces and private health care and pensionsystems) frees individuals from the tyranny of special interests and theincompetence and indifference of government bureaucrats and widens thescope of personal liberties. 15

Delegating social decisions to markets also has important economicconsequences. Most economists are wont to argue that it is much moreefficient to delegate decisions over the allocation of scarce social resources toprivate individuals acting on their own initiative and in accordance with theirown preferences in decentralized markets rather than to make them through thecollective decision-making process of government.' 6 Indeed, in the light ofrecent world history even some left-leaning critics of capitalism have concededthat markets are often highly efficient. 17 To paraphrase Robert Heilbroner, welive in the age of the triumph of capitalism, and markets play a central role in acapitalist economy.'8

13. MILTON FRIEDMAN & ROSE FRIEDMAN, FREE To CHOOSE: A PERSONAL STATEMENT115-19 (1980) (discussing the effects of special interest groups on government spending).

14. See CHARLES LINDBLOM, POLITICS AND MARKETS 65 (1977) (describing governments,or "authority systems," as having "strong thumbs, [but] no fingers").

15. See FRIEDMAN & FRIEDMAN, supra note 13, at 298-301 (advocating an "economic"Bill of Rights).

16. The First Fundamental Theorem of welfare economics states that a "Walrasian"equilibrium (a free market equilibrium that satisfies the conventional economic assumptions) is"Pareto" efficient. See HAL VARIAN, MICROECONOMIC ANALYSIS 191-203 (2d ed. 1984)(discussing the Pareto efficiency of a competitive equilibrium). Thus, it would be impossible toreallocate resources in such a way that any one person could be made better off without at leastone other person being made worse off. Id.

17. See Robert Heilbroner, The Triumph of Capitalism, THE NEW YORKER, Jan. 23, 1989,at 98 (acknowledging that the fall of the Berlin Wall and the transformation of Eastern Europeat the end of the twentieth century was, at its heart, a rejection of central planning in favor of themarket).

18. See id. (discussing the growth of democracy and the importance of the market

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But markets are also highly plutocratic. In a free market, the buyer withthe most purchasing power has the most influence over what gets produced andwho gets to consume it.19 Individual consumers decide whether they are goingto buy a summer house, drive a Ferrari, or give to the local food bank.Obviously, a wealthy person's decisions have a much bigger impact on theallocation of resources than a poor person's, and for the most part, the rich andwealthy choose to exercise their economic power primarily for their ownbenefit. But since markets are inherently plutocratic, and since the corporationis a market institution, how could the corporation ever have been anything lessthan plutocratic? If market mechanisms were just as plutocratic in the earlynineteenth century as today, why should the corporation have been any less so?

II. Democracy and the Social Meaning of the Nineteenth-Century Corporation

As Professor Dunlavy and others have documented, the corporation wasnot always as plutocratic as we might have expected--or at least, it did notalways appear to be as plutocratic as we might have expected. Shareholdervoting rules in the American corporation appeared to be much more democraticat the start of the nineteenth century than they are today.20 Professor Dunlavyfocuses on the transition from one-vote-per-shareholder to one-vote-per-share toput corporate governance in a historical perspective.21 From her vantage point,corporate decision-making became less democratic and more plutocratic as thenineteenth century unfolded.22

But if we are going to try to understand the social meaning of thetransition from one-vote-per-shareholder to one-vote-per-share, we should alsoput the social meaning of democracy in historical perspective. Thefundamental fabric of American social, political, and economic life changed

economy).19. One of the implications of the Second Fundamental Theorem of Welfare Economics is

that very different Pareto efficient allocations of resources can be achieved through alternativedistributions of initial property rights. See VARIAN, supra note 16, at 191-203 (explainingPareto efficiency).

20. See Dunlavy, supra note 1, at 72-76 (discussing the impact of democratic ideals oncorporate governance in the early nineteenth century).

21. See id. at 67 (stating that early nineteenth-century norms "tended to treat shareholdersmore like citizens in a relatively egalitarian polity").

22. See id. at 86-87 ("The power of the small shareholder declined" and "the corporationappeared more private than public and... the multitude of stockholders seemed more likepassive investors than citizens of the corporate polity.").

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quite dramatically during the nineteenth century.2 3 Ironically, if we track theevolution of the American people's voting rights through the nineteenthcentury, the United States appeared to become much more democratic ratherthan less. In fact, in the early nineteenth century American society appeared tobe highly plutocratic at precisely the time when the corporation appeared to bemore democratic.

Most black Americans in the early nineteenth century were slaves. It wasnot until the Fifteenth Amendment to the United States Constitution wasratified in 1870 that black men were given any kind of constitutional right tovote, and even then it was only in federal elections. 4 Moreover, in the yearsafter the Fifteenth Amendment was ratified, most Southern states enacted polltaxes and other voter qualifications that effectively disenfranchised most blackmales.25 These poll taxes and voter qualifications also disenfranchised somepoor white males and recent white male immigrants.26 Indeed, most Easternstates had some form of property qualification that restricted the voting rights ofpoor white males even before the Civil War; voting rights were usually broaderin the western states and territories, but possibly only because problems withland titles made property qualifications difficulty to administer. 27 Poll taxesand other property qualifications were not made unconstitutional in federalelections until the Twenty-Fourth Amendment was ratified in 1964, and they

23. This may sound like a platitude, since any nation must surely change in significantways over the course of an entire century, but the United States changed in much morefundamental ways during the nineteenth century than the twentieth century. Consider some ofthe important changes: fundamental developments in constitutional law (e.g., the power ofjudicial review), the Civil War, the Emancipation Proclamation, westward expansion, the canalsand railroads, and the Second Industrial Revolution.

24. See GEOFFREY R. STONE, Louis M. SEIDMAN, CASS R. SUNSTEIN, & MARK V. TUSHNET,

CONSTITUTIONAL LAW 847-48 (1996) (discussing the history of suffrage in the United States).It is interesting to note that the equal protection clause of the Fourteenth Amendment did notautomatically confer a constitutional right to vote on black males. U.S. CONST. amend. XIV,§ 2. In fact, Section 2 of the Fourteenth Amendment acknowledged that states might use voterqualifications to limit adult males' voting rights and specified a scheme for reducing theirrepresentation in Congress for doing so. Id.

25. In addition to poll taxes, some of the Southern states also enacted literacy andresidency requirements that disenfranchised many black males. Black males may have beeneven more effectively disenfranchised in the years immediately after the Civil War, however, bywhite-on-black electoral violence and intimidation. See RICHARD M. VALELLY, THE TwoRECONSTRUCTIONS: THE STRUGGLE FOR BLACK ENFRANCHISEMENT 91-96, 123-31 (2004)(discussing the various techniques used to keep black voters away from the polls duringReconstruction).

26. See DANIEL HAYS LOWENSTEIN & RICHARD L. HASEN, ELECTION LAw 30 (2d ed. 2001)(discussing the impact of secret ballots on poor and illiterate whites).

27. See id. at 26-28 (discussing possible explanations for broader voting rights in thewestern states).

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were not made unconstitutional in state elections until Harper v. VirginiaBoard of Elections,28 in 1966, in which the Supreme Court held that poll taxesviolated the equal protection clause of the Fourteenth Amendment.29

White women did not have the right to vote in any part of the country untilthe territory of Wyoming extended them suffrage in 1869.30 Colorado was thefirst state to grant women suffrage in 1893.3 And it was not until theNineteenth Amendment's ratification in 1920 that women had a constitutionalright to vote. Perhaps not coincidentally, the expansion in women's votingrights through the nineteenth century was correlated with an expansion in theirproperty rights. Under the common law that prevailed in all states at the start ofthe nineteenth century, a woman's husband acquired a right to possess andtransfer her real property as soon as they were married.32 The common law wasnot displaced until the states enacted various versions of the Married Women'sProperty Act.33 Mississippi was the first state to do so in 1839; the other statesenacted similar statutes throughout the remainder of the nineteenth century.34

But even these still delegated married women to subordinate domestic roles.35

28. Harper v. Va. Bd. of Elections, 383 U.S. 663 (1966).29. See id. at 666 ("[A] State violates the Equal Protection Clause of the Fourteenth

Amendment whenever it makes the affluence of the voter or payment of any fee an electoralstandard."). Harper did not confer a constitutional right to vote in state elections, it merelydeclared that voter qualifications based on wealth violate the equal protection clause. Id.; seealso Davis v. Bandemer, 478 U.S. 109, 133 (1986) ("[W]e would reject ... the holding that anyinterference with an opportunity to elect a representative of one's choice would be sufficient toallege or make out an equal protection violation."). Interestingly, the Court has upheld propertyqualifications where they are narrowly tailored to meet the purposes of government units withlimited spheres of authority. See, e.g., Ball v. James, 451 U.S. 355, 373 (1981) (upholding aproperty qualification in elections for directors of a water reclamation district in Arizona);Salyer Land Co. v. Tulare Lake Basin Water Storage Dist., 410 U.S. 719, 730 (1973)(upholding a property qualification in water storage district elections in California).

30. See Karen McGill Arrington, The Struggle to Gain the Right to Vote: 1787-1965, inVOTING RIGHTS IN AMERICA: CONTINUING THE QUEST FOR FULL PARTICIPATION 25, 32 (KarenMcGill Arrington & William L. Taylor, eds., 1992) (discussing the emergence of women'ssuffrage in the United States).

31. See id. (discussing the spread of suffrage throughout the states). By then Wyominghad also become a state. Colorado was followed by Utah and Idaho in 1896. Id. Even by thetime the Nineteenth Amendment was ratified by Congress, however, only twenty states hadextended the franchise to women. Id.

32. See JESSE DUKEMINIER & JAMES E. KRIER, PROPERTY 383-84 (5th ed. 2002)(discussing women's property rights under the common law).

33. See id. at 384 (stating that the Married Women's Property Act preempted statecommon law).

34. See id. (discussing the history of the Married Women's Property Act).35. See id. ("The Married Women's Property Acts... did not give the wife full

equality.").

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The task of achieving full equality for women has largely been left to privatelitigants and the courts.36

Throughout the first half of the nineteenth century, therefore, both womenand blacks were denied both property rights and voting rights. Some whitemales who lacked property were also denied voting rights. In the latter half ofthe nineteenth century, poll taxes and other voter qualifications were used todisenfranchise black males; they also disenfranchised some poor white males.With a few exceptions, primarily at the end of the nineteenth century, statescontinued to deny women suffrage until the twentieth century. By any standardof comparison, therefore, American society was highly plutocractic in the earlynineteenth century. There was an emerging ideology rooted in Puritan valuesand natural rights theories that emphasized political equality and this may wellhave helped to advance the idea of universal suffrage,37 but universal suffrageremained an idea rather than a fact until well into the twentieth century.

The social meaning of the corporation no doubt changed in importantways during the nineteenth century, but so, obviously, did the social meaning ofdemocracy. Ironically, the United States in general appeared to be far moreplutocratic and much less democratic at a time when the corporation appearedto be more democratic and less plutocratic. Indeed, against the social andpolitical background of early nineteenth century America, it is remarkable thatthe corporation appeared to be so democratic. But was the corporation of theearly nineteenth century really all that much more democratic than thecorporation today? And to the extent that it was, was this really because theemerging democratic values of the nineteenth century pervaded the conduct ofbusiness?

IV. Shareholder Voting Rights and the Economic Purpose of theCorporation

We have very little systematic evidence about early nineteenth centurycorporate governance, so these questions are difficult to answer. One recentstudy by Eric Hilt, however, implies that the early nineteenth centurycorporation may not have been nearly as democratic as Professor Dunlavy

36. See Reva B. Siegel, The Modernization of Marital Status Law: Adjudicating Wives'Rights to Earnings, 1860-1930, 82 GEO. L.J. 2127, 2130 (1994) (discussing the courts' role inreforming women's rights statutes in the nineteenth century).

37. See LowEsTEN & HASEN, supra note 26, at 27 (discussing the effect of privatelitigation on the evolution of women's rights).

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suggests.38 Hilt has compiled a data set using the records collected by the stateof New York from 1825-1828 in administering a capital tax that itimplemented in 1823 and from the state's grants of corporate charters. 39 Fromthe records he was able to obtain, he inferred that, on average, early nineteenthcentury corporations in New York had only about 72 shareholders, and that amajority of the shares was usually held by the ten largest shareholders.40

Moreover, most of the shareholders were residents of the same county as thecorporation a.4 On average, only ten percent of the shares were held by out-of-

42state owners. As Hilt observes, many charters were granted to corporationsthat either never began operations or soon failed and ceased operations.43 Ofthe corporations that remained in operation in 1827, over 60% of them weregoverned under a one-vote-per-share rule,44 and another 32% were governedunder a graduated voting rule;45 less than six percent were governed under thecommon law rule of one-vote-per-shareholder.46

38. See Eric Hilt, Corporate Ownership and Governance in the Early Nineteenth Century,(Apr. 2006) (analyzing the ownership and voting structures of corporations in New York state inthe early nineteenth century) (unpublished manuscript on file with the Washington and Lee LawReview).

39. See id. at 6-7 (discussing the sources of Hilt's statistical analysis).40. Id. at 10 (finding that, on average, the largest shareholder controlled 25% of the

shares).41. Id. at 11 ("[A]bout two-thirds of the shares were typically owned within the

corporation's county.").42. Id. Perhaps not surprisingly, a significant percentage of the shares were usually held

by owners in New York City, even for firms located in other counties.43. See id. at 13 (discussing the disproportionately high rate of failure among

corporations).44. Bainbridge notes that the early nineteenth century corporation may have been much

more plutocratic than these figures suggest. See BAINBRIDGE, supra note 7, at 451 (suggestingthat large shareholders were able to circumvent restrictions on their voting power by transferringtheir shares to straw men who would vote as directed). This practice apparently dated back tothe eighteenth century and was legal unless proscribed by statute. Id. at 451 n.2 1.

45. See Hilt, supra note 38, at 16 (noting that under graduated voting rules, shareholdersusually had one vote per share up to some amount and then less that one vote per sharethereafter). The total number of votes per shareholder might also be capped. Id.

46. A one-vote-per-shareholder rule was specified in only 1.8% of the corporate charters,but 4.1% of the charters did not specify any voting rule. Id. Since the common law default rulewas one-vote-per-shareholder, these additional firms may also have been governed under thatrule, although, as Hilt points out, some of them may have specified alternative voting rules intheir bylaws. See id. (discussing corporations' use of alternative voting rights in corporatebylaws). Although the New Jersey Supreme Court subsequently held that the common law rulecould not be superseded by corporate bylaws in Taylor v. Griswold, 14 N.J.L. 222 (N.J. Sup. Ct.1834), the New York courts never addressed the question and New York corporations may haveused their bylaws to specify shareholder voting rights both before and after Taylor.

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Perhaps most interesting of all, Hilt notes that there was a significantdifference in shareholder voting rules across different types of corporations. 7

Over 90% of the corporations engaged in manufacturing or insurance adopted aone-vote-per-share rule;48 while, only three percent of the corporations formedto construct and operate turnpikes adopted a one-vote-per-share rule.49 Theone-vote-per-share rule was also adopted by only 50% of the corporationsformed to construct and operate bridges.50 This is significant because therewere important differences in the economic purposes of these corporations.

In the early nineteenth century, turnpikes and bridges were essentiallylocal public goods. Between about 1790 and 1820 the population of New Yorkroughly tripled in size and so did the demand for transportation infrastructure.5'There was widespread opposition to providing new public turnpikes andbridges because people believed that this would result in tax increases. 52

Franchise corporations were thus formed to finance and build the turnpikes andbridges as an alternative to financing and building them publicly.53 Thesefranchise corporations therefore fulfilled a public purpose. As Alfred Chandlerhas observed, early nineteenth-century merchants viewed them as "privateenterprise in the public interest. 5 4 Indeed, the charters of the franchisecorporations typically regulated the conduct of their business in some detail,and the corporations rarely yielded profits for their shareholders. 55 Profits werenot the real objective: the real objective was to provide a public good.

47. See Hilt, supra note 38, at 18 (discussing the differences in voting rights acrossvarious industries).

48. See id. at 18. Hilt notes that New York enacted a general incorporation statute in1811 that set a default rule of one-vote-per-share. Id. at 4 (discussing the New York statute).However, some manufacturing firms continued to incorporate through special acts of thelegislature. Moreover, this was only a default rule and so they were free to specify analternative in their certificate of incorporation. See BAINBRIDGE, supra note 7, at 451(discussing the latitude in incorporation under the New York incorporation statute).

49. See Hilt, supra note 38, at 18 (providing a statistical analysis of the corporategovernance mechanisms used by various industries in the early nineteenth century).

50. See id. (providing comparative statistical analyses of various industries' choices ofcorporate governance).

51. See NATHAN MILLER, THE ENTERPRISE OF A FREE PEOPLE; ASPECTS OF ECONOMICDEVELOPMENT IN NEW YORK STATE DURING THE CANAL PERIOD, 1792-1868 4 (1962)(discussing the growth and expansion of New York City between 1790 and 1820).

52. See id. at 9 (discussing the resistance to the construction of public infrastructure).53. See ALFRED D. CHANDLER, THE VistLE HAND 28 (1977) (discussing the growth of

private corporations as alternatives to public works projects).54. Id. According to Chandler, the use of franchise corporations to build turnpikes was

common in all of New England and the middle states until later in the nineteenth century. Id. at34.

55. See Hilt, supra note 38, at 13 (discussing the initial charters of early franchise

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The majority of the shareholders of the franchise corporations weretypically local residents and merchants who stood to benefit from the newbridge or turnpike. 56 Given the public purpose of the franchise corporations itis hardly surprising that they typically featured more democratic governanceprovisions. The precise location chosen for a bridge or turnpike could have hada major impact on the distribution of its benefits. Under a one-vote-per-sharerule, a small minority of shareholders could have used their control of thecorporation in their own interests and to the detriment of the majority. Hilt thussuggests that the New York legislature favored some qualification of the one-vote-per-share rule in the charters of the franchise corporations as a checkagainst the abuse of the public interest for which the corporations wereformed.

57

It is interesting to contrast the franchise corporations in Hilt's sample withthe manufacturing corporations. One of the surprising results of Hilt's studywas the particularly high rate of failure for manufacturing corporations-over70% during the period of his sample. 58 This probably explains why themanufacturing corporations were generally closely held by a relatively smallnumber of shareholders. It also suggests why the one-vote-per-share rule wasthe norm for manufacturing corporations, since this would have facilitated tightcontrol and aligned decision-making power with the size of shareholders'stakes and their exposure to the risks. The failure rate for franchisecorporations was also high but only because of the difficulty of acquiring landand the protracted litigation that sometimes resulted from the efforts to do so.59

The franchise corporations did not need to make nearly as many importantinvestment and managerial decisions as the manufacturing corporations. Thus,the scope of more "democratic" shareholder voting rights seems to have beenlimited not only to those corporations that served a clearly defined public

corporations). In fact, in 1807 a law was enacted which standardized these provisions. Id. at 5.56. See id. at 13 (discussing the benefit to local businesses that resulted from new

construction).57. See id. at 18 (discussing the risk of a private shareholder using his voting power for

personal gain rather than fulfillment of a public good). The regulations appeared to have theintended effects: Although the franchise corporations were on average much smaller thanmanufacturing corporations, they also had more shareholders and more shareholders wererequired for majority control. See id. at 12 (comparing the shareholder makeup and votingpower of franchise corporations and manufacturing corporations).

58. See id. at 13 (showing that of 237 manufacturing charters granted prior to 1827, only62 resulted in an operating corporation in 1827).

59. See id. at 13 (discussing the challenges franchise corporations faced in formation andcontinued viability)

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interest, but also to those in which the exercise of shareholder voting rights wasless important to recouping a return on the shareholder's investment.

The relative prevalence of the one-vote-per-shareholder rule andqualifications of the one-voter-per-share rule in the early nineteenth centurymay thus have had more to do with the economic purpose and function of thenineteenth century corporation than they did with any social conception of thejustness of power relations between investors. The social meaning of thecorporation was no doubt very different then than it is now, but perhaps in largepart because its economic purpose was often different. As the nineteenthcentury proceeded, local and state governments increasingly began to displacefranchise corporations as the providers of transportation infrastructure.6 ° As therelative number of franchise corporations diminished, the one-vote-per-sharerule quickly became prevalent.61 In Hilt's sample, turnpike corporationsaccounted for over 80% of all new corporate charters at the start of thenineteenth century, but less than 20% of new charters by 1825. Manufacturingcorporations, on the other hand, were rare at the start of the nineteenth century,but accounted for over 20% of new charters by 1825.62 By 1825, over 80% ofthe new corporate charters in New York were for corporations that weregoverned under a one-vote-per-share rule.

V. Conclusion

The social meaning of the corporation no doubt changed quitedramatically during the nineteenth century, but so did its economic purpose andfunction. At the start of the nineteenth century the corporation was usuallycreated through a special act of the state legislature. It often had a sphere ofmonopoly power and was thought to be a privilege conferred upon the firms'owners by the state legislature. It often served as a means of pooling thefinances of a limited number of investors and securing limited liability for aprofit-making business venture. But it also commonly had a clear publicpurpose; in fact, at the start of the nineteenth century the corporation wascommonly used to pool the finances of local residents and merchants for the

60. See CHANDLER, supra note 53, at 34 (discussing the re-emergence of state-sponsoredinfrastructure construction).

61. See Hilt, supra note 38, at 19 (showing the increase of the one-vote-per-share rule asfranchise corporations became less prevalent).

62. See id. (providing a statistical analysis of industrial composition among chartersissued between 1800 and 1825).

63. See id. (providing a statistical analysis of the voting rights present in all corporatecharters issued between 1800 and 1825).

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SHAREHOLDER DEMOCRACY

purpose of providing local public goods, particularly turnpikes and bridges.The persistence of the one-vote-per-shareholder rule into the nineteenth centuryprobably had much to do with the use of the franchise corporation for theprovision of these local public goods. As the nineteenth century proceeded,local and state governments increasingly began to replace the franchisecorporations in fulfilling this function, and the role of the corporation changed.

Indeed, as the nineteenth century unfolded and the canals and railroadsconnected the far reaches of the country in a national transportation network,the market for many commodities and manufactured products became nationalin scope. With the potential size of their markets so vastly expanded,companies began to adopt new technologies that allowed them to realizeenormous economies of scale and produce new and better products at lowercosts. Because the new technologies required larger capital investments, andbecause the investments were often risky, business entrepreneurs needed betterways of raising large amounts of capital without compromising their control ofthe businesses. The common law rule of one-vote-per-shareholder clearlywould have impeded the growth of these new mass-production industries, andso it is no surprise that it had faded long before the end of the nineteenthcentury.

But it is doubtful whether the corporation was ever truly democratic in anyimportant sense. The persistence of the one-vote-per-shareholder rule in theearly nineteenth century probably had more to do with the public purposeserved by the franchise corporations than with any emerging nineteenth centurypolitical ideology or social norms. Further research will no doubt help toclarify exactly how important democratic values were to the governance of thenineteenth century corporation. But, in the end, the transition from one-vote-per-shareholder to one-vote-per-share may prove to be interesting as much forwhat it reveals about the forces that drive important changes in corporate lawand governance as for what it reveals about the social meaning of thecorporation. The lesson may well be that the social meaning of the corporationderives from its economic purpose and function.

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